Microsoft: The States’ Last Hurrah

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The opinion was straightforward. "Harm to 'one or morecompetitors,' however severe, is not condemned by the Sherman Actin the absence of … harm to consumers." With those words,federal judge Colleen Kollar-Kotelly pinpointed the driving forcebehind the Microsoft antitrust suit - an attempt by Microsoft'sdisgruntled rivals to use government for competitive advantage.

She went on to note that the attorneys general of the ninenon-settling states offered "little, if any, legitimatejustification" for the remedies they requested, which, for the mostpart, were "not supported by any economic analysis." Why, shewondered, would the states ask for relief "at this late stage… unrelated to [Microsoft's] monopoly market." Her answer:"Certain of Microsoft's competitors appear to be those who desirethese provisions."

In effect, nine states tried to replace the United States as theenforcer of federal antitrust laws - seeking broader relief thanthe federal settlement afforded, based solely on their differentview of the public interest. And they undertook that task at thebehest of companies like Sun Microsystems, which plays a major rolein the high-end server market, and AOL, which dominates Internetaccess, and Real Player, which rules the market for multimediasoftware.

All of that whining and political jockeying by Microsoft's giantrivals might be just grist for an intriguing tale of corporatecronyism, except that the cost of the litigation - in time, money,and diversion of executive resources - has been enormous.Microsoft's shareholders suffered an erosion of market valuemeasured in hundreds of billions of dollars. Indeed, Microsoftstock plummeted $80 billion on one day - April 3, 2000, when JudgeThomas Penfield Jackson issued his ill-fated conclusions of law,which were mostly overturned on appeal. Contrast that single-dayloss with the mere $60 billion that disappeared from investors' andemployees' portfolios in the aftermath of the Enron debacle.

Microsoft shareholders aren't off the hook yet. The companystill faces an onslaught of legal action, public and private. TheEuropean Union moves forward with its own antitrust investigation.Private lawsuits are under way, brought by consumer classes as wellas competitors. They can collect treble damages under U.S.antitrust laws, and they are in a much stronger position in lightof the Justice Department's litigation. Because the court held thatMicrosoft has a monopoly in operating systems and behavedanti-competitively, private litigants - without revisiting thoseissues - can proceed straight to proof of injury.

Because of murky statutes and conflicting case law, companieslike Microsoft can never be quite sure what constitutes permissiblebehavior. If the company can't demonstrate that its actions weremotivated by efficiency, conduct that is otherwise legal somehowmorphs into an antitrust violation. Normal business practices -price discounts, product improvements, exclusive contracting -become violations of law. Long-term, the answer is root and branchrepeal of the antitrust laws that Federal Reserve chairman AlanGreenspan described more than 30 years ago as a "jumble of economicirrationality and ignorance."

In the meantime, Congress ought to strip the states of most oftheir authority to enforce federal antitrust laws by suing onbehalf of state residents. Otherwise, some states will continue toabuse that authority - exercising it to impose sovereignty beyondtheir borders, cater to the parochial interests of politicallypowerful local constituents, and promote remedies that the federalgovernment has expressly considered and rejected.

Here are the rules that ought to govern when states propose tovindicate the private rights of their residents under federalantitrust law: First, states should not be allowed to litigate onbehalf of private parties who, on their own, have unhindered accessto the courts. Second, injury claims must be those related toresidents collectively or to a state's overall economy, notparticular parties. That reduces the likelihood that the litigationwill be instigated by special interests. Third, relief should be inthe form of money damages only, not conduct remedies. The problemwith conduct remedies is that they invariably affect out-of-stateresidents. Finally, no state should be permitted to sue if afederal agency is also suing, unless there are state-specificinjuries that are not addressed in the federal suit.

The underlying principle is this: Government frequently movesforward in the name of correcting market failure, apparentlywithout considering at all the possibility of government failure.As a result, economic losses from excessive regulation often causeimmense damage to producers and consumers. The Microsoft litigationis Exhibit A.